Q: The formula for the ‘Average Directional Movement Index’ (ADX) on page 268 (second edition of Trade Your Way), is this correct? I have been unable to reconcile my own calculations with those found at various financial websites. The majority of ADX calculations I have found involve exponential moving averages but ‘Trade your way…’ states that only a simple moving average is required?
A: The simple moving average is fine. If you want to go to the source on ADX, go to Wells Wilder’s book, New Concepts in Technical Trading. Actually when you think of it, if you really want the average true range (meaning a measurement of volatility over say the last 14 days), why would you do an exponential moving average? That would not give you an accurate measurement of what’s happening in terms of volatility.